Using a drawdown facility, you can take out additional loans with minimal paperwork and in a rapid, hassle-free manner. They are non-conventional business loans that can be restructured at any time. A ‘drawdown’ is a term used in finance to describe a period of time during which a credit line can be used. From lender to lender, there are a variety of ways to create this relationship.
What is a drawback of a drawdown facility?
A drawdown loan allows you to take a portion of a larger loan at a time; this provides you the flexibility to borrow as much as you need, whenever you need it. As a result, you won’t have to pay back interest on money that you didn’t need to borrow in the first place.
This implies that you can access future parts of the loan without completing further documentation, offering reassurance that a loan is available should you need it. The drawdown facility allows you to accomplish this. Read on to learn more about the various types of drawdown facilities.
Members of money purchase plans, such as personal pension plans and small business pension plans, have the option of taking withdrawals from their pensions. In accordance with the regulations of the plan and the possibility to transfer to another plan, members of these arrangements have a variety of options at their disposal. A lifetime annuity or drawdown facilities with the existing plan or a plan to which the assets can be transferred are the most common possibilities.
There is less certainty with drawdown pensions (although they may offer a short-term annuity option or investment in a protected fund), but they are then free to invest in assets that have a larger long-term potential for growth through active investment management.
Unless the funds are big and the impact of flat-rate fees is less important, they are likely to be more expensive than annuities.
There is no shared mortality experience or pooled funds with drawdown alternatives. As a result, no drawdown member can ‘win’ financially by the death of another person: there is no mortality gain. It is vital to consider mortality “drag,” the absence of a mortality benefit, while weighing the pros and cons of various options. In fact, the ‘drag’ gets worse as one gets older.
Drawbacks of a drawdown facility
- It is possible to run out of money in retirement because pension drawdown income is not guaranteed.
- If your investments fail, you may have to cut back on the amount of money you take home.
- You’ll need to keep an eye on your investments on a frequent basis to make sure you’re on track.
- Annuity rates may be lower in the future if you plan to purchase one later in life.
Drawdown in stages
In a money purchase plan, “phased drawdown” refers to a gradual and automated crystallization of monies held in the plan. Crystallization can be ‘segmented’ in order to make the option more feasible, or it can simply be phased in over a specific layout. There are two types of crystallizations: those that include a lump payment and those that do not.
While an annuity purchase is a good option for phased retirement, drawdown income can decrease rather than rise with each phase of withdrawal.
A predetermined income is used as the starting point for a phased drawdown. Staggered vesting or partial vesting, where a decision is made from time to time whether to encase money, is not the same as this type of vesting. It is possible for members to choose between a maximum income from a limited set or a minimum income from a large set of arrangements (including the minimum pension start-up lump payment element) (and the maximum lump sum element). The choice will determine the tax-free death lump sum benefit before age 75 generated from crystallized funds: the more arrangements crystallized, the smaller the lump sum death benefit, but the higher the tax-free part of the member pension…
In this case, the individual can have some assurance that they will be able to meet their financial obligations because they can control the frequency of their pension income payments.
As Rachel Smith, an associate consultant for Mattel Woods, says, this also allows customers to carry out tax planning in a more effective manner.
It’s not always the case with an annuity’s defined income that people may take control of their own tax position, so drawing down gives them more leeway to reduce their tax burden if they receive income from other sources.
If you’re a higher-rate taxpayer and want to take a lump sum over a long period of time (say, ten years), there’s a variation on these possibilities that’s worth considering. To a higher rate taxpayer, a lump sum payment is worth 166 percent of taxed income payment.
Get in touch with the team at Funding Bay to find out if your business can benefit from this alternative funding option!
